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Capital Assets
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  • 1. Capital Assets
  • 2. Capital Assets
    • Tangible assets used in the operations of a company
    • Have a useful life of more than one accounting period.
    • Recorded at cost - includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use.
  • 3. Amortization
    • The process of allocating to expense the cost of a capital asset to the accounting periods benefiting from its use.
    • Debit Amortization Expense and credit Accumulated Amortization.
    • Amortization Methods:
      • Straight-line (from chapter 4)
      • Units of production
      • Declining balance (double declining)
  • 4. Amortization: Units of Production Method
    • Charges a varying amount to expense for each period of an asset’s useful life depending on its usage. Charges are based on the consumed capacity of the asset.
    Step 1: Step 2: Amortization Per Unit = (Cost - Salvage Value) Total Units of Production Amortization Expense = Amortization Per Unit × Number of Units Produced in the Period
  • 5. Example Step 2: Amortization Expense = $.25 per shoe × 7,000 shoes = $1,750 Step 1: Amortization Per Unit = $10,000 - $1,000 36,000 units = $.25 per shoe
  • 6. Amortization: Double-Declining Balance Method Step 1: Step 2: Step 3: Double- declining- balance rate = 2 × Straight - line amortization rate Amortization expense = Double- declining- balance rate × Beginning period book value Ignores salvage value until later in life Straight - line amortization rate = 100 % Useful life in years
  • 7. Example Step 1: Step 2: Step 3: Amortization expense = 40% × $10,000 = $4,000 Double-declining- balance rate = 2 × 20% = 40% Straight-line amortization rate = 100 % 5 years = 20%
  • 8. Example Continued 2001 Amortization: 2002 Amortization: 40% × $10,000 = $4,000 40% × $6,000 = $2,400 $10,000 - $4,000
  • 9. Amortization and Income Tax
    • Many companies use accelerated amortization in computing taxable income because it postpones tax payments by charging higher amortization expense in the early years and lower amounts in the later years.
    • Income Tax Act requires that companies use a declining-balance method for calculating the maximum capital cost allowance that may be claimed in any period.
    • The Income Tax Act specifies the prescribed rates for various groups of assets
  • 10. Partial Year Amortization
    • When an asset is purchased at a time other than the beginning or end of an accounting period, amortization is recorded for the part of the year the asset was in use.
    • Two methods:
      • Nearest whole month
      • Half year rule – amortization for the first year of an asset’s life is always half a year regardless of when the asset was purchased
  • 11. Revising Amortization Rates
    • Over the life of an asset, new information may come to light that indicates the original estimates were inaccurate.
    • When our estimates change, amortization is:
    (Book value Revised salvage value) Revised remaining useful life
  • 12. Disposals of Capital Assets
    • Assets may be discarded, sold, or exchanged due to wear and tear, obsolescence, inadequacy, or damage by fire or other accident.
    • In general, accounting for disposals requires we:
      • Record amortization expense up to the date of disposal. This updates the accumulated amortization account.
      • Remove the balances of the disposed asset and related accumulated amortization accounts.
      • Record any cash (and other assets) received or paid in the disposal.
      • Record any gain or loss resulting from comparing the asset's book value with the value received in the disposal.
  • 13. Discarding Capital Assets
    • If fully amortized—no loss (can never have gain if discarding)
    • If not fully amortized—Record a loss (debit) equal to the book value.
  • 14. Discarding Capital Assets
    • Example: A machine costing $9,000 with accumulated amortization of $9,000 is discarded on June 5.
  • 15. Discarding Capital Assets
    • Example 2: A machine costing $8,000 with accumulated amortization of $6,000 on December 31, 2000 is discarded on July 1.The equipment is being amortized over 8 years with no salvage value.
  • 16. Selling Capital Assets
    • Compare value received to book value to determine gain (receive value greater than book value) or loss (receive value less than book value).
    • Sale is at a gain if value received exceeds book value.
    • Sale at a loss if value received is less than book value.
    • Record cash received (debit)
    • Remove accumulated amortization (debit).
    • Record a gain (credit) or loss (debit).
    • Remove the asset cost (credit).
  • 17. Selling Capital Assets
    • Example: Delivery equipment costing $16,000 with accumulated amortization of $12,000 (on December 31, 2001) is sold on April 1, 2002 for $3000. Annual amortization is $4,000 (straight-line).
  • 18. Selling Capital Assets
    • Sample example except sold for $7000
  • 19. Selling Capital Assets
    • Same example except sold for $2500
  • 20. Intangible Assets Non-current assets without physical substance. Useful life is often difficult to determine. Usually acquired for operational use. Intangible Assets Often provide exclusive rights or privileges.
  • 21. Intangible Assets
    • Patents
    • Copyrights
    • Leaseholds
    • Leasehold Improvements
    • Goodwill
    • Trademarks and Trade Names
    • Amortize over shorter of economic life or legal life, subject to a maximum of 40 years.
    • Use straight-line method.
    • Research and development costs are normally expensed as incurred.
  • 22. Goodwill
    • Occurs when one company buys another company.
    • Only purchased goodwill is an intangible asset.
    • The amount by which the purchase price exceeds the fair market value of net assets acquired.